1. Field of the Invention
This invention relates generally to the field of computer user interfaces, and more particularly to computer applications such as financial investments involving probablistic distributions and the interactive displays thereof.
2. Background
Individuals without special training who are outside the financial community but wish to investigate and make fairly sophisticated financial choices in stocks, bonds, mutual funds, or other investment vehicles have traditionally had to consult one or more "craftsmen"--specialist advisors or brokers versed in markets, statistics and probability to obtain customized advice on planning and making investments. More and more of these individual investors are being forced to develop investment strategies of their own as a result of changes in the workplace. Large corporate employers are increasingly trying to move the responsibility for benefits programs such as retirement benefits into the hands of employees, through such vehicles as 401(k) plans. The downsizing of many corporations has also led to a burgeoning of self-employed individuals who need to take full responsibility for investments and planning.
Financial planners at banks and brokerage houses employ specialists who offer these kinds of services to individuals. However, a typical advisor can usually only provide services to a limited number individuals a day, since this is labor-intensive. To employ people to provide such services, an institution usually has to charge fees or commissions that yield on the order of $1,000 USD a customer a year as of this writing. The institution's revenues and profits for such a service are thus limited by the labor-intensive nature of an advisory service.
Financial institutions have developed or purchased automation tools to help the advisors do their research but this has not greatly reduced the expense of employing personnel. If it costs $150,000 USD per person per year in fully-burdened costs to have advisors on staff, then the institution needs to have at least that amount of revenue per advisor in annual fees and commissions.
This means that the individuals seeking customized investment advice pay a fairly high premium for it.
For the financial institutions, this means that revenues for such services are essentially linear, in that they depend directly on the number of advisors employed. In economic terms, such a service is a variable-cost business, not a fixed-cost one.
Another problem with personalized investment advice is called "dispersion." That is, if two individuals of the same age, in the same occupations and family situations, having similar goals, priorities, and risk-taking profiles see two different investment advisors at the same financial institution it is quite possible they will get very different investment advice, simply because of the human differences in their advisors and the differences in the way people learn and absorb information. If one gets advice that is very successful for her and the other individual gets advice that yields poor results, this can sometimes be a problem for the institution.
The explosion of publicly available information on the Internet theoretically opens up more options for an individual investor. However, many people do not have the time or the inclination to find or absorb all the information available. Most of it is published in text form, linked by hypertext to other sites with articles of similar interest. While great strides have been made in the area of technical analysis of investments, using techniques such as neural networks, genetic algorithms, and fuzzy logic, much of this is complex and best approached by those having a background in mathematics and statistics as well as a thorough grounding in risk assessment techniques.
The relatively few individuals outside the financial community who actively pursue such information pro-actively can find special-purpose software programs to help them analyze the opportunities, such as MetaStock and Windows on Wall Street or Aexpert. The programs available for such use usually assume a significant amount of investment, market, and jargon sophistication in the user and most of them are sold to specialists, such as financial planners and portfolio managers, not individual "lay" persons. Some of the programs for specialists and pro-active end users are also optimized for a given type of result. For example, there are automated advice "black boxes" of computerized investment systems optimized for one purpose, usually for being very aggressive, such as taking positions in futures contracts that are heavily leveraged. That kind of optimization also makes them less practical for use by ordinary individuals. Others, such as Aexpert, optimize using known theories, such as the Nobel-prize winning concepts that are now collectively called Modern Portfolio Theory, which optimizes investments in the securities in a portfolio so that the risks associated with the different types of securities in the portfolio do not move in lockstep with each other but exhibit what is known as low covariance-in which the risk for one investment is likely to decrease as the risk for another with low covariance tends to go up.
Specialist software programs also exist for lower risk specialized areas, such as doing arbitrage, an example of which is buying currency in volume on one currency exchange and selling it for a slight profit on another. Arbitrage, like some other specialized forms of investment and speculation such as hedging, may not be a practical investment tool for many individual investors. These types of programs are usually used primarily by financial institutions.
For the majority of individual investors outside the financial community, who might be called "reluctant" investors, the amount of publicly available information is usually overwhelming. To many of the reluctant investors, esoteric choices, such as arbitrage or opportunities to get into "spot gold" are not useful. Similarly, while many people today are familiar with the concept of investing in a mutual fund as a simpler way to invest, there are now over 7,000 mutual funds to choose from.
While there are a few consumer financial investment programs for individual consumer use on home computers, such as Intuit's Quicken.TM. for IBM PC's and Wealthbuilder.TM. Apple Macintosh.TM. computers, these tend to be limited in scope. They are usually designed to help solve one or two problems, such as planning for retirement or planning for a child's college education, and the solutions they offer are usually based on formulaic approaches published in books and the financial press that do not take an individual's investment style, risk tolerance and other preferences into account in a significant way.
Not only are computer applications of broad scope for the ordinary individual investor lacking, so are education and adaptation. Most individuals employed outside of financial institutions have had very little education on mathematical analysis, probability and statistics, or financial matters. Public and private school curricula usually do not offer courses on the financial markets and investment vehicles as part of a general education. This is one reason why many individual investors seek out the services of a specialist advisor--to learn about the various markets and kinds of investments that are possible. A common error made by many individual investors who do not seek advice or take the time to learn is adopting a too conservative investment strategy out of ignorance.
For example, many books and publications directed to the "lay" investor say that if he or she is young, and has a good income, he or she can invest in riskier portfolios, while if the person is older and closer to retirement, he or she should invest in very low-risk or no risk vehicles such as money market funds. The younger person may prefer to have a higher probability of success than that offered by a riskier portfolio, while the older person may in fact need and want to invest in a portfolio that lowers risk but still provides a high probability of a good return over a shorter time period. A smaller percentage of individual investors make errors out of ignorance in another direction--by buying when the security price is high and selling, out of panic usually, when the price goes down. It is the fear of such losses that prompt the majority of individual investors to assume too conservative an approach to investment strategies for retirement funding, etc. As a result, ignorance in this area can be very costly, while education may well pay not only for itself but for a retirement or a child's college fund.
Studies have shown that different individuals tend to learn in different ways. Many people learn primarily through visual aids such as text or graphics, while others learn best through aural techniques such as hearing the spoken word, and still others through kinetic (or kinesthetic) or physical methods involving physical movement. In the same way, individuals may have different levels of risk aversion or risk-taking inclinations in their makeup. Thus, two individuals of the same income level, age, gender, profession, and life circumstances may still differ significantly in the way they absorb information and the way they feel about taking risks. One may prefer to learn through visual aids, and have a moderate aversion to risk-taking while the other person may prefer to hear someone explain a subject and have a high tolerance for risk-taking. Yet another may need to have some kind of "hands-on" physical involvement with he process to absorb information. Similarly, people vary in the degree to which they want to be involved in and in control of such activities as financial investments. Many simply prefer to keep it simple and delegate as much control as possible, but others may want to scrutinize every transaction.
In addition, the formulaic approaches used by many financial planners and in consumer financial planning investment programs usually ignore the fact that their projections arise from the use of probabilistic distributions (which can create a potentially unacceptable margin of error in the outcomes.)
First, those experts and programs which estimate retirement funds and investment strategies based on life expectancies usually do not explain to the user that life expectancy is a median. A median, as the term is used in statistics, is the middle value of a frequency distribution such as a Gaussian distribution such that the probabilities of the variable taking a value below and above it are equal. In other words, making plans based on a median is the same as taking a 50/50 chance that the individual's retirement fund will run out of money. Occasionally, a planner may use a 75th percentile for life expectancy instead of a median, providing a somewhat higher probability of adequate retirement funding--but still allowing for a 1 in 4 chance that the funding will run out.
Second, the plans and programs that project future earnings of a portfolio of selections based on average returns in the past, also introduce another 50/50 chance that projected average returns will not be there in the future.
Even fairly sophisticated investors and some advisors may be unaware of the consequences of plans calculated using medians and averages or fixed percentiles. Thus, the conservative, reluctant investor, who wishes to invest in such a way that he or she has a 75% to 95% probability of adequate returns over time, can unwittingly take on much more risk by basing strategies on the advice of planners and programs using median or fixed percentile life expectancies and average returns. The problem, in other words, does not arise solely from the use of plans based on medians or averages, but from the likelihood that the consequences of such use are not understood by the user.